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. Last Updated: 07/27/2016

Central Bank Makes 13th Rate Cut

The Central Bank cut rates on Thursday, as expected, and warned of a possible pickup in inflation in the second half, propping up the ruble on expectations that the year-old easing cycle may be coming to an end.

The benchmark refinancing rate will be reduced to 8 percent fr om 8.25 percent effective from Friday, in the Central Bank's 13th cut since April 2009, taking the cumulative easing to 500 basis points. Other rates were also cut.

"The trend of main economic indicators points to a gradual forming of a recovery trend in economic growth. … But on the whole, the recovery of the economy remains unstable. There remains a need to support the dynamics of domestic demand," the Central Bank said in a statement.

But it omitted last month's reference to the need to balance the domestic currency market — wh ere the ruble has hit repeated 16-month highs — and said a rise in inflationary pressures in the second half could not be excluded.

Market players said the fact that the statement did not mention the currency meant that the ruble could face further upward pressure.

"That's not bad for the ruble. Apparently, it sparked a clearly psychological reaction. It highlights that the Central Bank made up its mind [in favor of] further strengthening of the ruble," said a dealer at a major Western bank in Moscow.

Soon after the bank's statement, the ruble touched a session peak of 33.47 versus the dollar-euro basket, about 10 kopeks stronger than Wednesday's close.

The rate cut is likely to provide the ruble with technical support from rising demand for Russian bonds denominated in rubles.

"It will be positive for the forex market as it will create additional upward pressure for the ruble," said Alexander Morozov, chief economist at HSBC in Moscow.

"If year-on-year inflation continues to fall in the nearest future, its trend may demand more detailed analysis in order to take decisions on the advisability of future changes in interest rates," the Central Bank said.

It said it would also look at industrial and credit activity and the state of the domestic financial market.

"Analyzing the press release of the Central Bank, its language has changed a lot in the direction that the Central Bank has completed or almost completed the lowering of interest rates," Morozov said.

"If the economic recovery continues and there are firmer signs of improvement in lending activity, it is possible that there will be no more rate cuts," he said.

But officials have signaled that rate hikes should not be ruled out toward the end of the year, although analysts say Russia is likely to wait for moves from the European Central Bank and the U.S. Federal Reserve.

"One more rate cut will definitely happen, so we are confidently talking about 7.75 percent [for refinancing]. A cut to 7.5 percent is already less likely because the chances of inflationary pressures are growing," said Natalya Orlova, an economist at Alfa Bank.

The next rate decision is due in May, the Central Bank said.